Point of view

*                                       *                                                       *

Passing an act «About functioning of market of natural gas» will mean implementation of the European legislation in Ukrainian

LIGA, 28/10/2009

To date we stand on the threshold of global changes, both in the energy policy of Ukraine and basic principles of forming and conduct of business in an energy sphere. If skeptics will say now, that our expectations are very premature and power market is unforeseeable enough too to do some prognoses, want to notarize – not only the Ukrainian side and national companies, workings in this sphere, but also business-partners of our country are interested in a lead through in the short-term prospect of high-quality, effective reforms of gas market. From one side European power community expects and actively assists the lead through of reform of market of natural gas of Ukraine. 

We must acknowledge that Ukraine is important partner of the European Union in the field of deliveries and transporting of energy sources. A lead through of reforms is a chance to prove the reliability, ability to work stably, pursuant to market principles of economy, to develop the market pursuant to the tendencies of European Energy Community. From another site in passing to the market relations Russian «Gazprom» is also interested in gas business, about what repeatedly we could hear his representatives in appearances. It will enable the Russian monopolist to conclude long-term contracts, form prices on deliveries and transporting of natural gas by a market a way. Here our dependence mutual: we need gas from Russia, and Russia need users in Ukraine and Europe. With our, that Ukrainian party, it is high-quality new step in development of activity, both private and state companies at the market of natural gas, it is the new stage of liberalization of market of natural gas. Association the «Gas traders of Ukraine» from the beginning of the foundation supported market principles of organization of work at the market of natural gas, as his liberalization is directed on the improvement of quality of services, on large transparency of work of companies in a gas sphere.

Speaking about long-term price development, we can with a confidence assert that the epoch of cheap gas remained in the past. A gas cost already will not go back to the level of 5 or 10 year level. Reason of this is very simple: world demand grows on energy resources and the amount of the mastered oil and gas deposits continues to grow short. For this reason it is very important already today to begin to realize reforms, which allow creating the most optimum terms of work at the market of natural gas for suppliers and in also time loyal terms for users at the choice of supplier. Association the «Gas traders of Ukraine» ready to join, and calls all participants of market to the discussion of this normative document, as we consider, what only as a result of joint discussions basic principles of functioning of market of natural gas will be certain.

We are in a unique position – we are able to create the Ukrainian model of market of natural gas using the experience of the European and Russian colleagues, whose countries these reforms already actively pass in. So, by the spring of this year European Union was approved by a plan for liberalizations of gas market, so-called "third package". It is talked in a document, that every company, owning energy circuits and selling gas or electricity, must will be choose one of three variants of further existence.

The first supposes the division of two types of business and sale of one of them. It is possible to avoid in second case of division, however to manage a energy circuit an independent operator must will be. Other variant is supposed by the saving the integrated structures of the company on condition of that they will follow the special rules on an independent management the different types of business. On introduction of these rules the European countries get 3,5 years.

New rules will spread and on foreign companies, workings in ES. Ukraine does certain steps for included in European community, in particular – energy. Thus, bases of functioning of market of natural gas of Ukraine should be maximally close to the terms and rules, to operating in ES, and directed on creation of transparent, stable, competition relations between all participants of market of natural gas. Foremost, it is necessary to talk from point of mutual of long duration interests, taking into account the necessity of financing of the protracted investment projects, both on development of new gas deposits and on modernization of the gas-transport system. Transparent, clear all participants of condition of work give advantage which is characterized one capacious word is stability, that avouches for suppliers and users reliability and stability of gas-supplying, being the major element of power safety.

The lead through of effective reform and further stable development of gas industry requires harmonization of interests of suppliers and users. Exactly this should be a purpose of the bill «About functioning of market of natural gas in Ukraine». If to examine a project of the bill broadly speaking, he foresees not monopolization of relations in the field of trading in natural gas, introduction of market principles, development of competition relations, and introduction of energy saving technologies. A project of the bill determines first, who can be the owner of natural gas in Ukraine, namely are physical or legal persons regardless of pattern of ownership and submission which natural gas belongs as of right of property.  

In addition, a project of the bill provides for, that the right of ownership can arise up on the basis of contracts of joint activity. Also, new in the offered project of the bill is determination of concept «Market of natural gas», under which it is necessary to understand the aggregate of legal relationships in the process of purchase-sale of natural gas, grant of services in his transporting, storage, distributing and supply. Also it should be noted that a step is first done for the division of types of business in a gas sphere.

It is so assumed that extractive companies will be engaged in the booty of natural gas, and companies-suppliers, having the proper license to this type of activity, will be engaged in supplying to his users. As visible, such initiative expressly calls with the European rules of conduct of business in a gas sphere. Gas-distributing enterprises will carry out activity on transporting of gas gas-distributing networks to the users, while gas-transport enterprises will transport natural and oil gas main gas pipelines, to keep him with the use of objects of the gas-transport system. In obedience to a project of the bill general for two last enterprises is that the proper subjects have both gas-distributing networks and objects of the gas-transport system on ownership or use rights that allows them to carry out relative those functions on an operative-technological management.

A difference consists directly in determination of gas-distributing networks and objects of the gas-transport system. Gas-distributing networks are the making part of gas-transport system. A project of the bill enters also a concept of integrated enterprise, which on status is an enterprise or economic organization, where the proper enterprise or group of enterprises carries out, at least, one of functions on transporting, distributing or storage of natural gas, and, at least, one of functions of supply or booty. The separation of functions of transporting and distributing of natural gas of Ukraine is foreseen by the project of the bill. A project of the bill regulates right and duties the indicated subjects also.   

For example, a duty to place information on prices on natural gas and tariffs on his distributing, transporting and supply will depend upon suppliers, set the authorized executive public authorities on an own official site and in regional mass medias. Customers, who on the basis of contracts order services in transporting and distributing of natural gas to the users, are separately determined, to his trunk-to-trunk by territory of Ukraine or storage in dug-outs. The relations of subjects of market of natural gas will be regulated from now on contractual principles.

The contracts of supplying with natural gas, transporting of natural gas, distributing of natural gas, storage, will consist in accordance with this position (beginning to swing, storage, selection). Obligatory conditions for parties should be set in model contracts. By a project of the bill foreseen, that the subjects of market of natural gas will have equal rights for access to the Single gas-transport system of Ukraine. And to the subjects a project of the bill takes the proprietors of natural gas, booty, gas-distributing, gas-transport enterprises (operator), customers, gas-supplying enterprises not only, but also users and other physical or legal persons, relations between which are carried out on the basis of contracts.  

A project of the bill provides for, that the market of natural gas will function on the basis of free choice of suppliers, trading in natural gas, including - on auctions, exchanges, and also by the lead through of tenders, adjusting of level of tariffs on services in transporting, distributing, supply and storage of natural gas, access of new gas pipelines, to the single gas-transport system of Ukraine, conscientious competition, responsibility of subjects, providing of defense of rights and interests of users of natural gas and others like that. In also time a project of the bill is regulate state government, adjusting and control bases. Thus, it is needed to mark that this project of the bill as one of the stages of reform of gas market of Ukraine indeed foresees certain steps on a way to liberalization of market of natural gas, however and requires revisions.  

The decision of problems of industry and forming of prospects of its further development requires the incorporated efforts, therefore a variety of forms of collaboration and co-ordination of actions of market participants is a positive factor which will give fruitful results for the lead through of effective reform of gas market of Ukraine.

_______________________________________________

 ICIS Heren, "European Gas Markets", 24 August 2009

"Ukrainian distributors affiliate is created to boost flow security and payments" 

NAK Naftogaz Ukrainy has announced that it is creating an affiliate, Naftogazmerezhi, to which grid assets currently on the balance sheets of 43 regional gas distributors and suppliers will be transferred. The move is in accordance with a decision of the Ukrainian ministerial cabinet No. 775, June 2009, "on increasing the efficiency of the operation of state-owned gas distribution grids". The move will affect 43 regional distribution and supply companies (oblgazes and gorgazes) and some Naftogaz affiliates. Naftogaz said. "In this way, the obligation to provide secure and continuous gas supply and transport to the population, budget [government and local authority] entities and other state-run entities will be performed by DK Gaz Ukrainy and DP Naftogazmerezhi".

Vitaly Gnatushenko, deputy chairman of the Naftogaz Ukrainy board, has been appointed CEO of Naftogazmerezhi. A working group has also been formed at Naftogaz under the chairmanship of the company's first deputy chairman, Andrei Lopushanski, to handle the implementation of the ministerial decision. There are around 50 regional gas distributors in Ukraine, including 27 large ones. They supply the residential, communal and small and medium industrial sector. Large industrials tend to take gas direct from high pressure lines. The distributors engage both in gas distribution and supply with the end-user tariff bundling the commodity cost of gas and transport. Transport charges through the distribution grids are set by the Ukrain¬ian regulator NKRE and vary from company to company depending on the condition of the grid, distances covered and other factors. The average distribution charge comes to around Ukrainian grivnas 100/100km (Ђ8.24/100km).

Complex ownership structure
The ownership of the distributors is complex: NAK controls 17 of the larger ones, with the rest generally controlled by private companies. In Ukrainian law gas pipelines belong to the state - the regional distributors operate them on leasing agreements.

Those agreements are due to expire this September, according to Roman Storozhev, president of the Association of Ukrainian gas traders. While state ownership is indisputable with respect to pipelines built before the breakup of the Soviet Union, the status of lines built after that is not clear, and could cause problems for the consolidation of Naftogazmerezhi.

Ukrainian distributors supplying residential and communal users, such as district heating plants, buy their gas exclusively from the Naftogaz affiliate Gaz Ukrainy. This tends to be a loss-making sector of the market, with poor payment performance leading to losses for Naftogaz. The more profitable industrial sector is supplied not only by Gaz Ukraina but also by independent traders and gas producers and Gazprom Sbyt - a 100% Gazprom affiliate with a licence to supply up to 25% of the industrial market. Total industrial gas consumption in the Ukraine came to 4.7Gm3 in the first quarter (Q1) 2009, sharply down from the 9.4Gm3 in Q1 2008.

Naftogaz said it hoped that the creation of Naftogazmerezhi would "facilitate the efficient utilisation and development of the gas distribution grids, improve financial and payment discipline in the area of gas distribu-' tion and supply and create the conditions for a transparent functioning of the domestic gas market."

The Association of Ukrainian gas traders took a different view. Storozhev said the creation of Naftogazmerezhi "would allow the state holding to centralise financial flows to its own advantage and increase its own capitalisation."

Storozhev believed that the consolidation of the grids into Naftogazmerezhi would be difficult and slow, partly because of the varying ownership structure of the grids. This included "corporate ownership, i.e. grids built by the oblgazes themselves, as well as state and communal ownership. For example - a town may at one time have built a grid but did not transfer it to the balance sheet of the local oblgaz which subsequently used the grid". The process would be delayed by the necessity of making a grid inventory, which would take at least a year according to Storozhev.

"Even if the specially formed entity Naftogazmerezhi is to directly handle gas transport, someone will have to document the gas and service and maintain the grid infrastructure. In Ukraine, there is no alternative to using staff employed by the oblgazes to achieve this."

Nevertheless, Strozhev did not believe that the creation of Naftogazmerezhi would bring about a sudden halt in the activities of the distributors. He thought the least disruptive way to proceed would be for gas pipelines in state ownership to be put on the balance sheet of Naftogazmerezhi which would then take over the distribution and sale of gas.

But technical maintenance should be carried out exclusively by employees of the oblgaz's. That would more or less continue things as they were, just changing the flow of finance, with gas transport charges going direct to Naftogazmerezhi rather than via the oblgazes.

The oblgazes would receive payment for servicing the grids. Distributors that had independently constructed their own grids should maintain ownership of their assets and continue to operate them. "According to Ukrainian law it is not possible to take ownership [of the grids] away from them," Storozhev said.

Naftogaz tried to create a similar entity to Naftogazmerezhi a few years ago - it was called Ukrgaz Merezha. One of the reasons Naftogaz had for creating that entity was to improve the payment performance of its customers - there had long been a feeling in Ukraine that the oblgazes had not passed on in full to Naftogaz the payment they had received from their customers.

The contracts with Ukrgaz Merezha also required the distributors to invest part of their earnings in improving their gas infrastructure. How successful Ukrgaz Merezha was in achieving its aims is debatable. Naftogaz still complains of poor payment performance on the part of many of its customers. Now that Naftogazmerezhi is being brought into being, the likelihood is that Ukrgaz Merezha will be liquidated, Naftogaz told ICIS Heren. Whether Naftogazmerezhi is any more successful than its predecessor remains to be seen.

 ___________________________________________________